Paschal Donohoe looks to cool expectations on budget spend

Finance Minister Paschal Donohoe has said that €2.6bn of the €3.2bn in additional spending for next year has already been spent, in a clear attempt to dampen expectation.

Mr Donohoe announced the Government’s stability programme update (SPU) yesterday and unexpectedly brought forward his projections for spending in 2019.

He said the budgetary projections reflect the decisions made in Budget 2018 and the recent National Development Plan.

The report states: “They reflect precommitted expenditure of €2.6bn (€1.5bn for capital spending, €0.4bn to provide for demographic-related costs, €0.4bn for public sector pay, and €0.3 billion for carry-over costs associated with measures introduced this year).”

Mr Donohoe said he would stick to the confidence and supply agreement which commits to a two-to-one split in terms of spending increases and tax cuts.

This would mean Mr Donohoe is likely to spend another €900m on increasing the entry point at which people will pay the higher rate of income tax and further cuts to the universal social charge.

The SPU forecasts economic performance up to 2021. It says the Government is predicting growth of 5.6% this year and 4% next year, driven by a strong rise in employment, set to pass its pre-crisis peak this year.

This is a marked increase on its previous forecasts of 3.5% for 2018 and 3.2% for 2019.

The forecast outstrips the Central Bank’s prediction, released last week, of a GDP rise to 4.8%. The Central Bank says growth will be 4.2% in 2019.

Statistical distortions related to the multinational sector have called into question the relevance of using GDP to properly measure activity in the economy — many experts instead rely on the labour market as a more accurate barometer.

The SPU says that unemployment is set to fall to 5.8% this year from a high of 16% in 2012. The jobless rate is forecast to remain at 5.3% over the next two years as the economy reaches full employment.

Mr Donohoe said the short-term outlook for the economy is positive and this is delivering gains in the labour market.

He said that in the first half of this year, the level of employment will rise above its pre-crisis peak, a sure sign of the distance the country has travelled.

He cautioned that the country’s “hard-won gains” cannot be taken for granted.

Fianna Fáil’s finance spokesman, Michael McGrath, said: “It is encouraging that the draft SPU reaffirms that the overall outlook for the Irish economy remains positive.

“The Government needs to focus on the risks which have the potential to derail that favourable outlook, with particular attention on those risks that are within our control, including housing policy, loss of competitiveness, and the concentration of corporation tax receipts.”